How a Technological Advance That Increases Labor Productivity May Change Labor Employment
A technological advance that improves overall economic welfare will be termed a TTA. There are many ways to define a technological advance. Some analysts use the acronym TRIA but prefer the term technological progress. The other group uses the word techno-shift, which I find confusing.
A technological advance alters the nature of the relationship between demand and supply of a commodity. It can increase or reduce aggregate demand, depending on the changes in relative prices of other resources. For example, if new machinery is developed that makes the employment rate higher, there will be more people employed, and the employment rate is a key determinant of price elasticity of demand. If new machinery is invented that reduces the employment rate by 10 percent, there will be a reduction in the demand price elasticity.
So, let’s assume that a technological advance lowers the cost of production of certain commodities relative to what they were before. Current accountants assume that such an advancement reduces the employment cost for every individual who performs his or her job. According to them, everyone would then be able to perform the same job – no one would have to hold down a regular job. Current accountants are predicting something very different. According to them, in the future supply of accountants will exceed demand.
Current accountants would also like to lower the cost of production, and increase the supply of goods produced by any firm. But how would they get to that point? According to them, reducing the cost of production and increasing the number of workers to be employed because their marginal revenue product has risen, will result in more output – fewer workers to be employed, and hence, increased unemployment. They would not like to see unemployment rising, and that implies reducing the amount of output, and raising the cost of production – in that case, they will find a way to prevent inflation from rising, and thus keeping inflation at a reasonable level.
The trick is in getting the increase in the quantity of supply equalized with the decrease in the amount of demand. In other words, if a technological advance lowers the cost of production, and the quantity of supply increases, there should be a corresponding decrease in the demand, and vice versa. But it does not seem that there is a correlation between the two.
This leads to the question of why there is such a correlation between technology and unemployment. If MP increases due to a technological advance, what occurs? It is assumed that the unemployment rate will decrease because there will be more people working. Since there is a decline in the unemployment rate, the number of hours worked per week should decrease as well, and so on. Obviously, the result is that there is a net increase in unemployment, and a net decrease in the quantity of goods produced as a result of the rise in the price of goods.
However, there are a number of problems with this logic. First, MP does not directly lead to a decrease in the total amount of goods produced. The assumption that an increase in the demand leads to an increase in the production also leads to a net increase in the amount of surplus. There are other considerations, but basically the conclusion is that there is a very significant relationship between unemployment and the level of overall production. To understand this further, assume that the Federal Reserve Bank decides to lower the interest rate in order to increase aggregate demand, and then assume that by raising the rate people start saving money.
This increases the amount of money available for spending by the public. If unemployment is high, then the elasticity of demand is negative and the quantity of goods produced falls. By increasing the supply, the quantity of goods produced increases because the elasticity of demand is positive and the quantity people save increases because of increased investment by them. Thus, the supply curve flattens out and unemployment falls. This is just one example of how a technological advance or change in the economy may have a minimal effect on employment, but can change the shape of the employment curve.